In the House of Representatives, where federal laws are made and voted on, there is legislation being drafted to regulate or even ban stablecoins. With a ban in place of at least two years targeting algorithmic stablecoins.
Endogenously collateralized stablecoins
The bill would direct itself to new “endogenously collateralized stablecoins,” also known as unbacked stablecoins, by proposing a ban on issuing or creating them.
Endogenously collateralized stablecoins are stablecoins that are marketed as being convertible or redeemable for a fixed amount. But completely dependent on the value of another digital asset to maintain this fixed price.
The death spiral of Terra Luna
Consider here that Luna was used to keep TerraUSD – UST stable. Where TerraUSD – UST was designed to remain a 1-to-1 pegged to the U.S. dollar, by the buy and burn mechanism of Luna. But what ended up happening was a multiple billion dollar loss and a huge negative impact on the market as well as the confidence in the market. So legislation would seek to prevent similar stories.
In addition to addressing what happened to Terra, the bill would allow banks and non-banks to issue stablecoins. Bank issuers would have to seek approval from federal regulators, such as the OCC. In addition, it could study the impact of a potential U.S. digital dollar – also known as a central bank digital currency – and effects on the financial system and banking industry.
The panel’s time to consider the bill before the end of the year is shortening, also because midterm elections are likely to complicate the process. So we will have to wait and see but it is still unclear how the regulators plan to implement it.
Are they going to target the creators of unbacked stablecoins or are users going to bear the brunt of these law changes. And could this have a positive impact on fully backed stablecoins like Tether, Binance and Circle?